The Origin And Evolution Of The Financial States

The discussion about the decline of American hegemony has never stopped Since the United States established world hegemony through institutional arrangements in 1945. In particular, the American sub-prime mortgage crisis broke out in 2007 and quickly developed into a global financial crisis, some emerging countries put forward to the requirement to establish a multi-polar international monetary system. Dollar credit faced relatively serious challenges, the international community begun to concern about the decline of American financial hegemony. Many scholars begin to study the future direction of American hegemony and the issue of possible alternatives to America, but the result is indeed controversial. Until now, America remains the world's most powerful nation, and the dollar is still the dominant currency of the international monetary system.Ameirca as a modern country is the typical "financial state".It not only has the world's most advanced and developed financial markets and financial rule-making power, and the dollar as the world's key currency has strong sovereign currency capabilities.It is the powerful strength of the financial sector created today's United States, but also supported it to become the first global hegemonic state. We have to ask: why the United States can become a financial state? Its financial hegemony is the product of a mutation or a gradual accumulation in the development process? Why the past hegemony—Netherlands and England did not develop into the financial states? What conditions need to become a financial state? Combing these issues will constitute the topic of this paper: the origin and evolution of the financial states.With problem awareness, taking an objective and rigorous academic research attitude, using logic and comparative history analysis research methods, combining with international political economy and institutional economics perspective, at the basis of concluding the past hegemonic cycles theory, this paper builds a theoretical framework between the financial development and the rise and fall of hegemony which is used to explain important role of finance played in the rise and fall of hegemony. Based on the theoretical analysis, this paper attempts to see answers from the developing context of world economic history. It studies the hegemonic countries appeared in the history and analysis the role of finance development played in the rise and fall of hegemony in order to verify the theoretical analysis. Firstly , this paper researches the role of financial development in rise and fall of Netherlands and Britain which are hegemonic states in the history; Secondly, it deeply explores the formation and development of modern financial state - the United States; Finally, on the basis of history it draws the appropriate conclusions.During the Netherlands hegemony period, the financial market and financial organizations had played an important role in the rise, triumph and maturity of the hegemony. In the course of its decline, although the occurrence of financial crises caused by financial expansion played a significant role in the destruction, but the decline of commerce and trade was a decisive factor. This was related to the status and development level of trade relative to the financial in this period. In the Netherlands, commercial and trade relative to finance had a comparative advantage; but compared to other countries in this period, the Dutch financial sector has a comparative advantage. The Netherlands was a small country which had a large gap compared to France in the population size, land area and the preliminary development basis. However, it was by virtue of financial innovation, through the development of annuity markets and bond markets, reforming the tax system, establishing the Amsterdam exchange bank and the Dutch East India Company, it got the victory in the war within eighty years against the Spanish and a series of hegemonic wars against French, eventually it became the most powerful European countries at this period. It could be said that the struggling history in Netherlands is a financial innovation history. Dutch had played a pioneer role in the fields of financial markets, financial institutions and financial instruments, which could not be done by other countries in the same period. However, with the effect of rigid system and path dependence, Netherlands was gradually surpassed by the coming British with greater market to support financial development.In British hegemony period, the institutional arrangements and financial development played a vital role in the process of rise, victory and maturity of British hegemony. Particularly, except for the financial markets, organizations and institutions, the role of British Pound as the monetary sovereignty had arisen obviously, which was not available in Holland. During the decline process of British hegemony, the differences had immerged on domestic market size, financial innovation capacity and the development of capital market between British and America. The British has generally turning into a debtor nation from creator under the impact of two World Wars and the Great Depression, and lost its hegemony while British Pound was no more international currency. British could be said as a"quasi-financial state", for obviously it took comparative advantage over the other countries, especially while the role of British Pound as international currency helped it gained the position of world financial centre. However, in terms of the overall domestic economy, British mainly relied on the growth of manufacturing industry, and acted more like a big trading nation. This related closely with the temporal pattern of"Agriculture Industry----Manufacture Sector"on international labor division. Under such situation, driven by the powerful production capacity led by industrial revolution and the widespread of free trade policy, British grew up rapidly to an international economic power. Finance played a vital role of catalyst and driven force in the rise and fall of British hegemony. Without the support of financial capital, it was impossible to develop its joint-stock company and promote industrial revolution; without the development of financial market, especially bond market, it was impossible to provide continuous, large scale funds with low interest; also without the support of British Pound's international status, UK was impossible to obtain the core status in international trade and finance sector. Therefore, although the finance development was not the most obvious and determining factor, its role could not be underestimated. Since then, especially after two world wars, the UK lost its status as creator nation and the Pound's leading position, finally gave up its hegemony position to a country with more powerful financial innovation capacity and yiability.In America, the rise and fall of its hegemony related very closely with the development of finance. The Wall Street had become the epitome of American finance, it's development was changing the trend of American economy. Compared with the other countries at the same period, the America not only had the comparative advantage but also had absolute advantage in the financial industry. During this period, the international labor division was transferring to"Manufacturing Sector—Finance Sector",and the technology innovation driven by the Third Technology Revolution provided conditions needed by the separation of finance industry from service sector. From the independence war to the civil war, from the establishment of Breton Woods System to the creation of Dollar system, from the Asia financial crisis to the global financial crisis, finance went through every period in the course of establishment and fall of American hegemony. And in the future, the decline of American hegemony will be surely and roundly reflected in the financial sector. Different from the Netherlands and the UK, America does not need to be trade surplus country and creator nation to maintain its hegemony status. In contrast, the USA maintains the development model of double deficits, and has change into a real"financial nation"through global financial expansion. Relying on dollar credit, America willfully consumes the resources all around the world. As a financial superpower, capitalization has become the core concept of the American capitalism.Throughout history we find that the emergence of U.S. financial hegemony is not just a problem of mutation or stage. It can be found in historical context, and also evolutes step by step from the development path of hegemonic states in the past. In theory and history test, this paper obtains three conclusions:Firstly, financial development played a very important role in the rise and fall of the hegemony, which was reflected in the rise, victory, maturity and decline periods of hegemony, and was closely related to the development of trade and business.The role of the finance developed from weak to strong with the varies of time background, industry structures and international division of labor, showing a dynamic evolution process. When it developed to the American period, financial hegemony has been formed as the most important force to support the hegemony, and the America has become the "financial state".Secondly, a country becomes a "financial state" requires a few conditions:(i) the government with democratic constitutional system which is suitable for financial development; (ii) a strong and efficient domestic market which can support the financial development; (iii) the sound banking system and highly developed capital market; (iv) the strong currency sovereign capacity; (v) the liberal trading system and large-scale trade needs; (vi) the information systems which is able to provide credit support for the financial development.Thirdly, the United States as a modern country has financial hegemony, although it is currently suffering the impact of global financial crisis, its political, military and economic comprehensive strength, especially financial strength is still the world leader. Analyzing the several conditions necessary for a "financial state ", there has not candidate which is able to compete with the U.S. However, according to the laws of the rise and fall of hegemony, the United States hegemony finally will come to an end, while a new large country will rise in chaos of the world economy. Whether the next candidate will appear in Europe or Asia, it would be a country or a union of countries, these are still unknown. The only way to be determined is that the next "financial state" will have the necessary basic conditions for formation of the financial states.